Incremental Oil and Gas Limited (ASX:IOG), a AUDA$2.02M small-cap, operates in the oil and gas industry which has seen an extended oil price slump since mid-2014. However, energy-sector analysts are forecasting for the entire industry, negative growth in the upcoming year , and a single-digit 7.36% growth over the next couple of years. This rate is below the growth rate of the Australian stock market as a whole. Should your portfolio be overweight in the oil and gas sector at the moment? Today, I will analyse the industry outlook, as well as evaluate whether IOG is lagging or leading its competitors in the industry. See our latest analysis for IOG

What’s the catalyst for IOG’s sector growth?

The oil price collapse triggered a wave of cost reduction among energy businesses as the sector as a whole faced negative growth over the past five years. Global oil and gas companies cut capital expenditures by about 40% during 2014 and 2016, and as part of this cost cutting initiative, some 400,000 workers were let go, with major projects cancelled or deferred. However, recently the sector saw a reversal in the downturn, and in the previous year, the industry saw growth of over 50%, beating the Australian market growth of 5.37%. IOG lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means IOG may be trading cheaper than its peers.

Is IOG and the sector relatively cheap?

The energy sector’s PE is currently hovering around 11x, lower than the rest of the Australian stock market PE of 17x. This means the industry, on average, is relatively undervalued compared to the wider market – a potential mispricing opportunity here! Though, the industry returned a similar 12.16% on equities compared to the market’s 11.92%, potentially illustrative of a turnaround. Since IOG’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge IOG’s value is to assume the stock should be relatively in-line with its industry.

What this means for you:

Are you a shareholder? IOG recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto IOG as part of your portfolio. However, if you’re relatively concentrated in oil and gas, you may want to value IOG based on its cash flows to determine if it is overpriced based on its current growth outlook.

Are you a potential investor? If IOG has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the oil and gas industry. Before you make a decision on the stock, take a look at IOG’s cash flows and assess whether the stock is trading at a fair price.

For a deeper dive into Incremental Oil and Gas’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other energy stocks instead? Use our free playform to see my list of over 300 other oil and gas companies trading on the market.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.